Why Amazon.com, Inc. Buying Wayfair Inc Is a Bad Idea

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Wayfair stock - Why Amazon.com, Inc. Buying Wayfair Inc Is a Bad Idea

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If you own Amazon.com, Inc. (NASDAQ:AMZN) stock, you definitely don’t want to see the company buy Wayfair Inc (NYSE:W). The same is true if you’re a Wayfair employee. But if you own Wayfair stock, you’d love to see it happen. 

Here’s why.

Amazon Shareholders Should Frown on Idea

The Boston Globe painted an idyllic picture of the online home goods retailer May 2 after Wayfair announced an $80-million non-GAAP loss in the first quarter, almost double the loss in the same quarter a year earlier.

“As with Amazon, Wayfair’s employment growth seems boundless. The company added 1,000 positions in the past quarter alone, driving the total workforce up 13 percent to 8,750 as of March 31,” wrote the Globe’s Jon Crespo.

“That means the company is onboarding an average of 15-plus employees per workday. And Boston brokers expect a big Wayfair lease to be signed soon, as the company expands its Back Bay base.”

Who wouldn’t want to buy a company with this kind of growth — a 48% year-over-year revenue increase in Q1 2018 to $1.4 billion with a 33% increase in active customers to 11.8 million? Wayfair is seemingly the perfect acquisition for Seattle’s e-commerce powerhouse.

Heck, Boston’s even in the running for Amazon’s HQ2; the synergies would be massive. Right? Wrong.

Amazon doesn’t have a problem generating revenue. It doesn’t need to buy sales; it needs to buy products and services its customers don’t have. Most of the stuff Wayfair is selling isn’t necessarily unique to Wayfair.

In the first quarter, Amazon’s North American sales were $30.7 billion, 46% higher than a year earlier. Meanwhile, its North American operating profits were $1.1 billion, 93% higher than a year earlier.

Why would it want to buy Wayfair for between $7-$10 billion to add a money-losing operation with $5 billion in revenue? At least Whole Foods was making money.

To think some analysts believe this notion makes sense illustrates why investors shouldn’t listen to analysts.

It’s a dumb idea.

Why Wayfair Employees Should Fear a Buyout

Do you remember the feel-good story in February about Amazon buying Ring for $1 billion after being rejected by Shark Tank in 2013?

From what I’ve heard, many of the employees that work at Ring either have been pushed out the door or could be in the future, to make way for Amazon employees who can get the job done saving the company money.

It often happens in buyouts, and while I’m sure the Wayfair employees are all friendly people, Amazon is laying off its employees at a time when the company is booming.

Don’t think for a second that Jeff Bezos wouldn’t gut the company if he thought his existing e-commerce operations (think Zappos.com, etc.) could handle the heavy lifting.

But, you can breathe easy because I don’t see Wayfair being the type of company Bezos wants to blow billions on. I just don’t.

If You Own Wayfair Stock

You have to hope that Amazon makes an offer, preferably at an outrageous price, before negative Wayfair stock news sends Wayfair’s share price tumbling into the $30s.

Don’t think it can happen?

InvestorPlace’s Luke Lango said this about Wayfair stock in early April. I’m 100% in agreement with his viewpoint.

“The big driver of revenue growth going forward will have to be customer growth. But that has come down meaningfully, too (67% in fiscal 2015, 54% in fiscal 2016, and 33% in fiscal 2017). Plus, competition from Amazon and others is only heating up,” wrote Lango Apr. 9. “Thus, the most likely outcome over the next several years is a continuation of that decelerating revenue growth trend.”

He then goes on to suggest there’s a good possibility that Wayfair stock could drop by 50% over the next four years.

Amen, to that.

Personally, I don’t see the company ever making money. It has terrible margins despite the fact its business model avoids holding inventory.

Unless I’m missing something, as my colleague hinted, I too see this ending badly for Wayfair shareholders — but not if Amazon comes to the rescue.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/why-amazon-buying-wayfair-is-a-bad-idea/.

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